Solana Policy Institute Seeks SEC Exemption for DeFi Developers: Here’s Why

The Solana Policy Institute has formally requested the U.S. Securities and Exchange Commission (SEC) to grant a specific exemption for those developing decentralized finance (DeFi) applications.

Key Takeaways

The Solana Policy Institute has requested the SEC to exempt developers of decentralized finance (DeFi) from stringent regulations.
The Institute argues existing SEC regulations are ill-suited for the operations of DeFi.
Developers face increasing legal risks, and the lack of clear exemptions complicates their efforts.
There is growing support among policymakers for protective measures for blockchain developers who do not hold user funds.
Proposed legislation aims to create a clearer regulatory environment for crypto innovation.

Solana Policy Institute Seeks SEC Exemption for DeFi Developers: Here’s Why

The Institute argues that releasing open-source and non-custodial software shouldn't impose the same regulatory risks on developers as those faced by centralized cryptocurrency exchanges and other financial intermediaries. This request comes as a response to the increasing regulatory scrutiny and legal uncertainties that currently challenge DeFi innovation within the United States. Despite a shift by policymakers towards more defined regulations, the pressure on the sector remains high.

SEC’s Centralized Framework is Inadequate for DeFi

In a letter submitted to the SEC on Friday, the nonprofit responded to a request for public input by Commissioner Hester Peirce regarding how crypto-assets are traded on national securities exchanges and alternative trading systems.

The Solana Policy Institute specifically called for the SEC to ensure that individuals can create and deploy software and conduct transactions through autonomous systems without facing unnecessary regulatory obstacles.

The Institute argued that the SEC’s existing regulations, which are designed for centralized financial intermediaries, do not align with the operations of smart contract-based systems. In DeFi, users maintain control over their assets, authorize their transactions, and interact directly with public blockchains. The software itself doesn't manage funds or act on behalf of users, which means the typical risks associated with trust are absent in these decentralized environments.

The Institute believes that enforcing broker, dealer, exchange, or clearing agency regulations on non-custodial software would be inappropriate and could hinder development. Such enforcement could force decentralized platforms to either shut down or resort to centralized control, which contradicts the investor protections that regulatory bodies aim to uphold.

Legal Challenges for Crypto Developers

The push for clarity comes amidst increasing legal risks for developers. In recent years, several high-profile cases have targeted those who created or maintained open-source projects, including actions related to mixers in the crypto space. Additionally, both the SEC and the Commodity Futures Trading Commission have pursued developers over registration and compliance issues, even when their projects were built to operate independently.

Developers in the crypto industry contend that the absence of clear exemptions puts them in a difficult position, balancing innovation and the threat of personal legal repercussions.

The position taken by the Solana Policy Institute resonates with recent comments from SEC leaders. Chairman Paul Atkins has criticized the agency's previous dependence on enforcement-based regulation and insisted that developers should not have to adhere to securities laws merely for publishing code. Similarly, Commissioner Peirce has expressed that responsibilities shouldn’t be imposed on developers who don’t manage assets or override user decisions.

Moving forward, the Solana Policy Institute suggested a technology-neutral framework based on custody and control practices. According to this approach, true intermediaries would be regulated because they manage customer funds or have control over transaction execution, while developers of non-custodial software would be outside the registration requirements.

The Institute urged the SEC to issue interpretive guidance that makes it clear that developing and maintaining such software does not constitute operating an exchange or facilitating transactions for third parties. They also recommended narrowing the Exchange Act Rule 3b-16 to explicitly exclude passive tools and interfaces.

This letter was sent as Congress and regulators discuss broader reforms. Senators Cynthia Lummis and Ron Wyden recently proposed legislation to protect blockchain developers who do not manage user funds from money-transmitter regulations. Additionally, the ongoing crypto market structure bill, known as the CLARITY Act, includes similar safeguards.

Moreover, Chairman Atkins has indicated that a formal "innovation exemption" could be finalized soon, which would provide temporary regulatory relief for qualifying projects.